10. The Governmental Accounting Standards Board established generally accepted accounting principles for all state and local government entities, as well as all nongovernment entities.

MULTIPLE CHOICE (CHAPTER 1)

1. A primary characteristic that distinguishes governmental entities from business entities is
a) the need to generate revenues equal to or in excess of expenditures/expenses.
b) the importance of the budget in the governing process.
c) the need to provide goods or services.
d) the correlation between revenues generated and demand for goods or services.

2. Which of the following characteristics is NOT a characteristic that may distinguish a governmental or not-for-profit entity from a business entity?
a) There is often no direct link between revenues generated and expenditures/expenses incurred.
b) Capital assets may neither produce revenues nor save costs.
c) Revenues may not be indicative of demand for goods and services.
d) The mission of the entity will determine the goods or services provided.

3. The most significant financial document provided by a governmental entity may be
a) the balance sheet.
b) the operating statement.
c) the operating budget.
d) the cash flow statement.

4. Which of the following statements is NOT true?
a) All governmental entities engage in similar activities.
b) There are many different types of governments.
c) Governments may engage in activities similar to activities engaged in by for-profit entities.
d) Managers may have a short-term focus and thereby sacrifice the long-term viability of the entity.

5. Which of the following activities is NOT an activity in which a governmental entity might engage?
a) Selling electric power.
b) Operating a golf course.
c) Operating a book store.
d) All of the above are activities that might be carried out by a government.

6. In which of the following activities is a not-for-profit entity least likely to engage?
a) Providing educational services.
b) Providing health-care services.
c) Providing for the national defense.
d) Retail sales of cookies.

7. To obtain a comprehensive understanding of a government’s fiscal health, a financial analyst should obtain an understanding of which of the following?
a) All of the resources owned by the governmental entity.
b) All of the resources which may be summoned by a governmental entity.
c) Demographic data about the residents served by the governmental entity.
d) All of the above.

8. Which of the following is common to both governments and not-for-profit entities but distinguishes these entities from for-profit entities?
a) The budget is generally the most significant financial document.
b) Revenues are not necessarily indicative of demand for goods or services.
c) There is frequently no direct link between revenues and expenses.
d) All of the above are common to both governments and not-for-profit entities but distinguish them from for-profit entities.

9. Which of the following is NOT a purpose of external financial reporting by governments? External financial reports should allow users to
a) Assess financial condition.
b) Compare actual results with the budget.
c) Assess the ability of elected officials to effectively manage people.
d) Evaluate efficiency and effectiveness.

10. Which of the following is NOT a reason that users of government and not-for-profit external financial statements need to have information to enable them to assess the financial condition of a government?
a) To determine the ability of the entity to meet its obligations.
b) To determine the ability of the entity to continue to provide services.
c) To predict future fiscal developments.
d) To evaluate the overall profitability of the entity.

11. Users of financial statements should be interested in information about compliance with laws and regulations for which of the following reasons?
a) To determine if the entity has complied with bond covenants.
b) To determine if the entity has complied with taxing limitations.
c) To determine if the entity has complied with donor restrictions on the use of funds.
d) To determine all of the above.

12. Which of the following is NOT generally considered a main user of government and not-for-profit entity external financial statements?
a) Investors and creditors.
b) Taxpayers.
c) Donors.
d) Management.

13. Which of the following is NOT a probable use a donor would make of the external financial statements of a not-for-profit entity?
a) To determine the creditworthiness of the entity for investment purposes.
b) To determine the proportion of entity resources directed to programs as opposed to fund-raising.
c) To determine the salaries paid to the top officials of the entity.
d) To determine the allocation of resources within the entity.

14. A regulatory agency would use the external financial statements of a local government for which of the following purposes?
a) To assure that the entity is spending and receiving resources in accordance with laws, regulations or policies.
b) To help assess management’s performance.
c) To exercise general oversight responsibility.
d) To do all of the above.

15. Which of the following objectives is considered to be the cornerstone of financial reporting by a governmental entity?
a) Accountability.
b) Budgetary compliance.
c) Interperiod equity.
d) Service efforts and accomplishments.

16. Which of the following is NOT an objective of financial reporting by governmental entities as established by GASB?
a) Financial reporting should assist users in determining if current period revenues were sufficient to pay for current-period services.
b) Financial reporting should assist users in assessing the management skills of top management.
c) Financial reporting should assist users in evaluating the operating results of the governmental entity for the year.
d) Financial reporting should assist users in assessing the level of services that can be provided by the governmental entity and its ability to meet its obligations as they come due.

17. Which of the following is NOT an objective of financial reporting for not-for-profit entities as established by FASB? Financial reporting should provide information that is useful to present and potential resource providers and other users in:
a) Making rational decisions about the allocation of resources to those organizations.
b) Assessing the services provided and the entity’s ability to continue to provide those services.
c) Assessing the types of services provided and the need for those services.
d) Assessing how managers have discharged their stewardship responsibilities.

18. As used by GASB, interperiod equity refers to which of the following? Financial reporting should:
a) Demonstrate compliance with finance-related contractual requirements.
b) Provide information to determine whether current-year revenues were sufficient to pay for current-year services.
c) Demonstrate whether resources were obtained and used in accordance with the entity’s legally adopted budget.
d) Provide information to assist users in assessing the government’s economy, efficiency, and effectiveness.

19. Given a specific set of data, the basis of accounting selected by or imposed on a governmental entity will least affect which of the following?
a) Determining whether or not the governmental entity has a balanced budget.
b) Determining whether or not the governmental entity has the ability to issue debt.
c) Determining whether or not certain events occurred.
d) Determining the annual payments to a government-sponsored pension plan.

20. The Governmental Accounting Standards Board is the primary standard-setting body for:
a) All governments.
b) All state and local governmental entities.
c) All governments and all not-for-profit entities.
d) All state and local governments and all not-for-profit entities.

21. Under certain circumstances a governmental entity might use standards established by which of the following standard-setting bodies?
a) GASB.
b) FASB.
c) AICPA.
d) All of the above.

22. The primary standard-setting body for accounting and financial reporting by a state-supported college or university is:
a) GASB.
b) FASB.
c) AICPA.
d) All of the above.

25. Which of the following rule-making authorities would establish accounting standards for all nongovernment not-for-profits?
a) AICPA.
b) FASB.
c) GASB.
d) APB.

PROBLEMS (CHAPTER 1)

1. Thorn County adopted a cash budget for FY2000 as follows. The City budget laws prohibit budgeting or operating at a deficit. During the year the County collected or spent the following amounts. Was the County in compliance with the budget? Did the County accomplish the goal of interperiod equity? Explain your answers in detail.

Explanations provided by the City for the differences between budget and actual are as follows. Property tax collections are down because the major industry in the community closed and many citizens are currently unemployed. Operating expenses are up because the only bridge over a river bisecting the City sustained damages by an uninsured motorist and had to be repaired immediately. The repair was not budgeted.

2. Save-the-Birds (STB), a not-for-profit entity dedicated to acquiring and preserving habitat for upland birds, prepares financial statements in accordance with generally accepted accounting principles. Currently, standards require that a not-for-profit entity report as revenue in the year received virtually all contributions. During the current year STB received a donation of several hundred acres of prime habitat for upland birds. STB will require several hundred thousand dollars in additional donations in order to make the land completely suitable for the birds. Before embarking on its fund-raising campaign STB prepares financial statements which are summarized as follows.

What difficulties, if any, will Save-the-Birds encounter in their new fund-raising drive? Knowing that the donation of the land accounted for $1,000,000 of the revenue reported by Save-the-Birds, do you think the financial statements present fairly the financial position and results of operations of this not-for-profit entity?

3. Johnson City prepares its budget on the cash basis and prepares its external financial statements on the accrual basis. From the following data prepare statements of activity (income statements) on both the cash basis and the accrual basis. Which statement best represents the results of operation of the City? Which statement best demonstrates compliance with laws and regulations? Which statement would you rather see? Which conveys the best information to the citizens of Johnson City?

The City levies taxes in the current year of $1 million. Of this amount $.9 million is collected during the current year, $.05 will be collected next year, and $.04 will be collected in the future. $.01 will never be collected. During the current year the City pays bills from prior periods $.06 million, bills of the current period $.8 million, and defers payment until future periods bills that were received for services consumed during the current period $.1 million.

ESSAY (CHAPTER 1)

1. In the United States, educational services can be provided by federal governmental entities, by non-federal governmental entities, by not-for-profit entities, and by for-profit entities. Are the accounting and financial reporting standards the same for each of these entities? Should they be the same?

2. The Governmental Accounting Standards Board (GASB) stated that an objective of financial reporting should be to measure interperiod equity. “Financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services.” What is your understanding of ‘interperiod equity.’? What costs incurred in the current year should be paid for by the taxpayers of the current period? What costs incurred in the current year should be paid for by future taxpayers?

3. A not-for-profit entity raises funds to support specific programs, services, and activities. The recipients of the programs, services, and activities are frequently not the providers of the resources to deliver the programs, services, and activities. What information would donors to these not-for-profit entities be interested in seeing? What information would program beneficiaries be interested in seeing? Identify other users of the financial statements of a not-for-profit and the types of information in which they would be interested.

Chapter 2

Fund Accounting

TRUE/FALSE (CHAPTER 2)

1. A fund is a separate fiscal and accounting entity with a self-balancing set of accounts.

2. Fund accounting promotes control and accountability over restricted resources.

3. The basis of accounting determines what transactions and events are recognized.

4. An entity’s measurement focus determines when transactions and events are recognized.

5. If an entity adopts a full accrual basis of accounting, its measurement focus will automatically be on all economic resources.

6. If an entity adopts a modified accrual basis of accounting, its measurement focus will automatically be on current financial resources.

7. A government may report some of its funds on a full accrual basis.

8. A government may have as many general funds as it deems necessary.

9. Funds divide a government into functional departments.

10. General funds are established to account for resources legally restricted for specified purposes.

11. Fiduciary activities only benefit parties other than the government itself.

1. What is the primary reason that governmental entities use fund accounting?
a) Fund accounting is required by law.
b) Fund accounting is required by GAAP.
c) Fund accounting promotes control and accountability over restricted resources.
d) Fund accounting promotes better control over operating activities.

2. Basis of accounting determines which of the following?
a) When transactions and events are recognized.
b) What transactions and events will be reported.
c) Where transactions and events will be reported.
d) Why transactions and events will be reported.

3. A fund is
a) A separate legal entity.
b) A separate fiscal and accounting entity.
c) A separate self-balancing set of accounts for inventory purposes.
d) None of the above.

5. When a governmental entity adopts a basis of accounting other than full accrual and a measurement focus that excludes long-lived assets and liabilities in its governmental fund types:
a) It is in violation of the law.
b) It is in violation of GAAP.
c) It has recorded transactions in accordance with standards for presentation in the fund financial statement required by the new GASB reporting model.
d) It has the ability to better measure the results of operations.

6. A city receives a donation from a citizen who specifies that the principal must be invested and the earnings must be used to support operations of a city-owned recreational facility. The principal of this gift should be accounted for in which of the following funds?
a) Trust fund.
b) Special revenue fund.
c) Permanent fund.
d) Internal service fund.

7. Which of the following is NOT a governmental fund?
a) City Hall Debt Service Fund.
b) City Utilities Enterprise Fund.
c) Gasoline Tax Special Revenue Fund.
d) City Hall Capital Project Fund.

8. Which of the following accounts would you least expect to see in a debt service fund?
a) Principal payments.
b) Interest charges.
c) Interest earned.
d) Outstanding balance of the debt being serviced.

9. Which of the following funds is a proprietary fund?
a) Internal service fund.
b) Special revenue fund.
c) Capital project fund.
d) Permanent fund.

10. Which of the following funds is a governmental fund?
a) Enterprise fund.
b) Debt service fund.
c) Internal service fund.
d) Agency fund.

11. Which of the following activities should the City of Highland account for in a trust fund?
a) General fund contributions received by the City pension plan.
b) Greens fees received from golfers at the City-owned golf course.
c) Grants received from the Federal government to purchase buses to be used for public transit.
d) Proceeds of bonds issued to construct a new city hall building.

12. The state collects a gasoline tax that must be used to support highway construction and maintenance. The gasoline tax should be accounted for in which of the following funds?
a) General fund.
b) Special revenue fund.
c) Debt service fund.
d) Internal service fund.

13. The City of San Jose built a new city hall and financed construction by issuing bonds due in installments over the next 30 years. The bond principal and interest will be paid by a special tax levied on property in the City. The money received from this special tax should be accounted for in which of the following funds?
a) General fund.
b) Special revenue fund.
c) Capital project fund.
d) Debt service fund.

14. Riverside Golf Course is a City-owned golf course that collects greens fees in amounts sufficient to cover its expenses. Riverside Golf Course should be accounted for in which of the following funds?
a) Internal service fund.
b) Enterprise fund.
c) General fund.
d) Special revenue fund.

15. To fulfill the printing needs of its various departments and agencies, the City has established a Central Print Shop which bills the various departments and agencies of the city for printing services rendered. The Central Print Shop should be accounted for in which of the following funds.
a) Internal service fund.
b) Enterprise fund.
c) General fund.
d) Special revenue fund.

16. Which of the following funds is accounted for on the modified accrual basis of accounting?
a) General fund.
b) Internal service fund.
c) Proprietary fund.
d) Pension trust fund.

17. Which of the following assets would NOT be found in the fund balance sheet of the General Fund of the City of Harrison?
a) Cash.
b) Capital assets.
c) Receivable from Special Revenue Fund.
d) Receivable from State.

18. Which of the following liabilities would NOT be found in the fund balance sheet of the General Fund of the City of Marmaduke?
a) Accounts payable.
b) Payable to the special revenue fund.
c) Deferred revenue.
d) Bonds payable, due in 5 years.

19. For which of the following entities is fund accounting mandated?
a) American Hospital Association.
b) City of New York.
c) Grace Lutheran Church.
d) United Way.

20. Governments most commonly separate resources into funds to assure that they adhere to restrictions placed on them by
a) legislators.
b) grantors.
c) donors.
d) all of the above.

PROBLEMS (CHAPTER 2)

1. Assume that the City of Ft. Smith maintains its books and records in a manner that facilitates the preparation of the fund financial statements. For each of the following events indicate in which fund(s) of the City of Ft. Smith the event would be recorded and justify your fund selection.

a. The City collected property taxes levied for the general operations of the City.
b. The City collected property taxes levied to pay principal and interest on bonds issued several years in the past to construct a new fire station.
c. The City collected property taxes levied on a specific area of the City for the purposes of providing more frequent snow removal than is enjoyed by the rest of the City.
d. The City sold bonds to finance the construction of a new City Hall.
e. The City sold bonds to finance major renovations at the city-owned electric utility.

2. Assume that the City of Amber maintains its books and records in a manner that facilitates the preparation of the fund financial statements. Amber City maintains a general fund, a capital project fund, and a special revenue fund. During 2002, the City engaged in the following transactions. Record all transactions. Be sure to clearly indicate the fund in which the entry is made.

a. The City sold bonds, face value $26 million, at par to finance the construction of a new City Hall.
b. The City purchased two new police cars at a total cost of $50,000.
c. The City collected $8,000 in taxes dedicated for the eradication of noxious weeds.
d. The City spent $6,000 on pesticides for noxious weeds.
e. The City acquired a new tractor for $75,000. The City paid $20,000 in cash, and signed a $55,000 note which is due in three years.

3. Assume that the Blackfoot County maintains its books and records in a manner that facilitates the preparation of the fund financial statements. Blackfoot County engaged in the following transactions during the current month. Prepare journal entries in the general fund to record these events.

a. Paid salaries to County employees, $100,000.
b. Borrowed $35,000 at a local bank to use to buy a County car.
c. Purchased an automobile for the use by County administrative officials, $35,000.
d. Made a $7,000 payment on the outstanding accounts payable.
e. Collected $3,500,000 of the current property tax lavy.
f. Received a $50,000 grant from the State to support general government activities.

4. For each of the following funds list the basis of accounting it should use, either modified accrual or full accrual.

a. General fund
b. Debt service fund
c. Internal service fund
d. Investment trusts
e. Private purpose trusts
5. For each of the following funds list the measurement focus it should use, either current financial resources or economic resources.

1. Why do governments and not-for-profit entities use fund accounting?

2. Governments use the modified accrual basis of accounting and a current financial resources measurement focus when presenting the fund financial statements of the governmental funds, but they use the accrual basis of accounting and the flow of economic resources for the government-wide financial statements. What is a basis of accounting? What is measurement focus? How does the selection of one affect the selection of the other?

3. For what purposes do governmental and not-for-profit entities use agency funds? What are the distinguishing characteristics of agency funds?

4. Briefly describe the three broad categories of activities that most general-purpose governments engage in.

Chapter 3

Government Financial Reporting

TRUE/FALSE (CHAPTER 3)

1. In addition to preparing fund financial statements, governments should also prepare consolidated financial statements to provide information on the financial position and operating results of the government as a single economic entity.

2. Fiduciary activities should be reported in fund statements, but should be excluded from the government-wide statements.

3. To prepare their government-wide statements, governments must adjust the governmental fund statements from the full accrual basis to the modified accrual basis.

4. The format that may now be used for the government-wide statement of net assets is “assets plus liabilities equals net assets.”

5. The government-wide statement of activities bears little resemblance to the income statement of a business.

6. A reservation of fund balance is, in essence, an additional restriction on fund resources.

7. Internal service fund balances generally are included in the governmental activities column of the government-wide statement of net assets, rather than in the business-type activities column.

8. A governmental funds balance sheet does not include capital or other noncurrent assets.

9. Fund balance is equal to fund assets plus fund liabilities.

10. Footnotes are not required to be included as part of the basic financial statements of governments.

MULTIPLE CHOICE (CHAPTER 3)

1. __________ is governments’ responsibility to report the extent to which they have met their operating objectives efficiently and effectively, using all resources available for that purpose, and whether they can continue to meet their objectives for the foreseeable future.
a) Fund accountability.
b) Fiscal accountability.
c) Operational accountability.
d) Government accountability.

2. __________ is the responsibility of governments to justify that their actions in the current period have complied with public decisions concerning the raising and spending of public moneys in the short term.
a) Fund accountability.
b) Fiscal accountability.
c) Operational accountability.
d) Government accountability.

3. Which of the following is NOT considered Required Supplementary Information (RSI)?
a) Notes to the financial statements.
b) Management’s Discussion and Analysis.
c) Budgetary comparisons.
d) Pension schedules.

4. Government-wide financial statements should include
a) the statement of net assets, and the statement of activities.
b) the statement of net assets only.
c) the statement of activities only.
d) the statement of net assets, the statement of activities, and the statement of cash flows.

5. In addition to government-wide statements, GASB Statement No. 34 requires fund financial statements be included in the government’s basic set of financial statements. The basic fund financial statements that should be included for governmental funds are
a) the Balance Sheet and
the Statement of Revenues, Expenditures, and Changes in Fund Balance.
b) the Statement of Nets Assets,
the Statement of Revenues, Expenses, and Changes in Fund Net Assets, and
the Statement of Cash Flows.
c) the Statement of Fiduciary Net Assets, and
the Statement of Changes in Fiduciary Net Assets.
d) the Balance Sheet,
the Income Statement,
the Statement of Cash Flows, and
the Statement of Retained Earnings.

6. In addition to government-wide statements, GASB Statement No. 34 requires fund financial statements be included in the government’s basic set of financial statements. The basic fund financial statements that should be included for proprietary funds are
a) the Balance Sheet and
the Statement of Revenues, Expenditures, and Changes in Fund Balance.
b) the Statement of Nets Assets,
the Statement of Revenues, Expenses, and Changes in Fund Net Assets, and
the Statement of Cash Flows.
c) the Statement of Fiduciary Net Assets, and
the Statement of Changes in Fiduciary Net Assets.
d) the Balance Sheet,
the Income Statement,
the Statement of Cash Flows, and
the Statement of Retained Earnings.

7. In addition to government-wide statements, GASB Statement No. 34 requires fund financial statements be included in the government’s basic set of financial statements. The basic fund financial statements that should be included for fiduciary funds are
a) the Balance Sheet and
the Statement of Revenues, Expenditures, and Changes in Fund Balance.
b) the Statement of Nets Assets,
the Statement of Revenues, Expenses, and Changes in Fund Net Assets, and
the Statement of Cash Flows.
c) the Statement of Fiduciary Net Assets, and
the Statement of Changes in Fiduciary Net Assets.
d) the Balance Sheet,
the Income Statement,
the Statement of Cash Flows, and
the Statement of Retained Earnings.

8. The aim of the government-wide statement of activities is to show
a) the net cost of each of the government’s main functions and programs.
b) the net income for the government as a whole.
c) the net income for the government’s governmental activities and fiduciary activities.
d) the net income for the government’s governmental activities and proprietary activities.

9. The government-wide statements should be prepared using
a) the cash basis.
b) the full accrual basis.
c) the modified accrual basis.
d) the modified accrual basis for the governmental activities, and the full accrual basis for the business-type activities.

10. In the fund financial statements, the statements for the governmental funds should be prepared using
a) the cash basis.
b) the full accrual basis.
c) the modified accrual basis.
d) the modified cash basis.

11. In the fund financial statements, the statements for the proprietary funds should be prepared using
a) the cash basis.
b) the full accrual basis.
c) the modified accrual basis.
d) the modified cash basis.

12. In the fund financial statements, the statements for the fiduciary funds should be prepared using
a) the cash basis.
b) the full accrual basis.
c) the modified accrual basis.
d) the modified cash basis.

13. Per Statement No. 34, the GASB requires that governments present their budget versus actual comparisons on a __________ and include a schedule that reconciles the actual amounts per the budgetary comparison with the GAAP amounts per the financial statements.
a) full accrual basis
b) modified accrual basis
c) cash basis
d) budgetary basis

15. The Basic Financial Statements of a city do not include which of the following?
a) Government-wide Statement of Net Assets.
b) Government-wide Statement of Activities.
c) Government-wide Statement of Cash Flows.
d) Balance Sheet for each governmental and proprietary fund.

16. Which of the following would NOT be found in the business-type activity column of the government-wide Statement of Net Assets of the City of Smithville?
a) Cash.
b) Inventory.
c) Capital assets.
d) Receivable from general fund.

17. Which of the following would NOT be found in the Statement of Net Assets of Teton City?
a) Cash.
b) Capital assets.
c) Receivable from special revenue fund.
d) Inventories.

18. The focus of the Statement of Activities of the city of West Hills is on which of the following?
a) Determining the total expenses by natural classification.
b) Determining the total expenses by function.
c) Determining the total revenues by function.
d) Determining the net cost of functions.

19. Under the new GASB reporting model for governmental entities, which of the following is required?
a) Only one set of financial statements, prepared on the full accrual basis of accounting.
b) Only one set of financial statements, prepared on the modified accrual basis of accounting.
c) Two sets of financial statements, one similar to the pre-GASB #34 reporting requirements using the current financial resources measurement focus and modified accrual basis of accounting and one that combines all governmental activities in one column and all business-type activities in another column using the full accrual basis of accounting for both columns.
d) Two sets of financial statements, one exactly like the pre-GASB #34 reporting requirements using the current financial resources measurement focus and modified accrual basis of accounting and one that combines all governmental activities in one column and all business-type activities in another column using the full accrual basis of accounting for both columns.

21. Under the new GASB reporting model for governmental entities, the focus of the entity-wide activity/operating statement is on which of the following?
a) Program revenues and expenditures.
b) Program revenues and expenses.
c) Net income.
d) Net program revenues/expenses.

PROBLEMS (CHAPTER 3)

1. Listed below are the names of the two government-wide financials statements and the seven fund statements that should be included in the government’s basic financial statements. Identify each as either a government-wide statement, a governmental funds statement, a proprietary funds statements, or a fiduciary funds statement.

2. Listed below are the names of the two government-wide financials statements and the seven fund statements that should be included in the government’s basic financial statements. Identify the appropriate basis of accounting, either modified accrual or full accrual, that should be used to prepare that statement.

3. Listed below are the names of the two government-wide financials statements and the seven fund statements that should be included in the government’s basic financial statements. Identify the appropriate measurement focus, either economic resources or current financial resources, that should be followed to prepare that statement.

1. Concerning the government-wide statement of net assets, describe what information is included in the governmental activities column, the business-type activities column, and the column for the total primary government.

2. The activities of an internal service fund are presented on the Statement of Revenues, Expenses, and Changes in Fund Net Assets in the fund financial statements. Why? Where are the activities of an internal service fund presented on the Government-wide Statement of Activities? Why?

3. Contrast the reporting of major funds in the governmental funds financial statements versus that of nonmajor funds.

Chapter 4

Governmental Activities – Recognizing Revenues

TRUE/FALSE (CHAPTER 4)

1. If an entity elects to focus on all economic resources (both current and long-term assets and liabilities), then it should adopt a modified accrual basis of accounting.

2. The budgetary measurement focus of governments is determined by applicable state or local laws.

3. The revenue-recognition issues facing governments are simpler to resolve than those of businesses.

4. Governmental activities tend to derive the majority of their revenues from exchange transactions.

5. In accounting for property taxes, under the modified accrual basis, existing standards provide that, except in unusual circumstances, revenues should be recognized only if cash is expected to be collected within sixty days of year-end.

6. Ad valorem taxes are taxes that are based on value.

7. Income taxes are classified as ad valorem taxes.

8. Sales taxes are taxpayer assessed, that is, parties other than the beneficiary government determine the tax base.

9. All intergovernmental grants are accounted for in exactly the same way.

10. Revenues that cannot be classified as general revenues are by default considered program revenues.

11. Taxes that are imposed on the reporting government’s citizens are considered general revenues, even if they are restricted to specific programs.

MULTIPLE CHOICE (CHAPTER 4)

1. As used in governmental accounting, interperiod equity refers to a concept of
a) providing the same level of services to citizens each year.
b) measuring whether current year revenues are sufficient to pay for current year services.
c) levying property taxes at the same rate each year.
d) requiring that general fund budgets be balanced each year.

3. The modified accrual basis of accounting is used in presenting the fund financial statements of the governmental funds because
a) it is the superior method of accounting for the economic resources of any entity.
b) it provides information as to the extent the entity achieved interperiod equity.
c) it is budget oriented while facilitating comparisons among entities.
d) it results in accounting measurements based on the substance of transactions.

4. As used in defining the term ‘modified accrual basis of accounting’, available means
a) received in cash.
b) will be received in cash within 60 days of year-end.
c) collection in cash is reasonably assured.
d) collected within the current period or expected to be collected soon enough thereafter to be used to pay liabilities of the current period.

5. Under the accrual basis of accounting, property tax revenues are recognized
a) when they are received in cash.
b) in the year for which they were levied.
c) in the year for which they were levied and when collection in cash is reasonably assured.
d) when they are available to finance expenditures of the fiscal period.

6. Under the modified accrual basis of accounting, the amount of property tax revenues that should be recognized by a governmental entity in the current year related to the current year levy will be
a) the total amount of the levy.
b) the expected collectible portion of the levy.
c) the portion of the levy collected.
d) the portion of the levy collected in the current year or within sixty days of the fiscal period.

7. Under the modified accrual basis of accounting used by a governmental entity, investment revenues for the current period should include
a) only interest and dividends received.
b) all interest and dividends received during the period plus all accruals of interest and dividends earned.
c) all interest and dividends received plus gains and losses on securities that were sold during the period.
d) all interest and dividends received, all gains and losses on securities sold and all changes in market values on securities held in the portfolio at year-end.

8. Under the accrual basis of accounting used by a governmental entity, investment revenues for the current period should include
a) only interest and dividends received.
b) all interest and dividends received during the period plus all accruals of interest and dividends earned.
c) all interest and dividends received plus gains and losses on securities that were sold during the period.
d) all interest and dividends received, all gains and losses on securities sold and all changes in market values on securities held in the portfolio at year-end.

9. Under the modified accrual basis of accounting, derived nonexchange revenues are recognized by a governmental entity as revenue
a) when the underlying exchange transaction occurs.
b) when available.
c) when the underlying event occurs and the revenue is available.
d) when earned.

10. Under the accrual basis of accounting, derived nonexchange revenues are recognized by a governmental entity as revenue
a) when the underlying exchange transaction occurs.
b) when available.
c) when the underlying event occurs and the revenue is available.
d) when earned.

11. Under the modified accrual basis of accounting, gains and losses on disposal of fixed assets
a) are not recognized.
b) are recognized when the proceeds (cash) of the sale are received (on the installment basis).
c) are recognized only if there is a gain.
d) are recognized when the sale occurs, regardless of when the cash is collected.

12. Under the accrual basis of accounting, gains and losses on disposal of fixed assets
a) are not recognized.
b) are recognized when the proceeds (cash) of the sale are received (on the installment basis).
c) are recognized only if there is a gain.
d) are recognized when the sale occurs, regardless of when the cash is collected.

13. Under the modified accrual basis of accounting, fines, license fees, permits, and other miscellaneous revenue are generally recognized
a) when cash is received.
b) when assessed.
c) when an enforceable legal claim exists.
d) when an enforceable legal claim exists and the revenue is available.

14. Under the accrual basis of accounting, fines, license fees, permits, and other miscellaneous revenue are generally recognized
a) when cash is received.
b) when assessed.
c) when an enforceable legal claim exists.
d) when an enforceable legal claim exists and the revenue is available.

15. A city which has a 12/31 fiscal year end has adopted a policy of recognizing the maximum amount of property tax revenue allowable under GAAP. Property taxes of $600,000 (of which 10% are estimated to be uncollectible) are levied in October 1999 to finance the activities of the fiscal year 2000. During 2000, cash collections related to property taxes levied in October 1999 were $500,000. In 2001 the following amounts related to the property taxes levied in October 1999 were collected: January $25,000; March, $5,000. For the fiscal year ended 12/31/00, what amount should be recognized as property tax revenues related to the 1999 levy on the fund financial statements?
a) $600,000.
b) $540,000.
c) $525,000.
d) $500,000.

16. A city that has adopted a 12/31 fiscal year end has adopted a policy of recognizing property tax revenue consistent with the 60-day rule allowable period under GAAP. Property taxes of $600,000 (of which none are estimated to be uncollectible) are levied in October 2000 to finance the activities of fiscal year 2001. Property taxes are due in two installments June 20 and December 20. Cash collections related to property taxes are as follows:
1/15/01 for property taxes levied in 1999, due in 2000 $ 25,000
2/15/01 for property taxes levied in 1999, due in 2000 $ 15,000
3/15/01 for property taxes levied in 1999, due in 2000 $ 10,000
6/20/01 First installment of taxes levied in 2000, due 6/20/01 $350,000
12/20/01 Second installment of taxes levied in 2000, due 12/20/01 $150,000
1/15/02 for property taxes levied in 2000, due in 2001 $ 15,000
2/15/02 for property taxes levied in 2000, due in 2001 $ 10,000
3/15/02 for property taxes levied in 2000, due in 2001 $ 5,000
The total amount of property tax revenue that will be recognized in the government-wide financial statements in 2001 is:
a) $600,000.
b) $575,000.
c) $535,000.
d) $525,000.

17. Under GAAP, property taxes levied in one fiscal period to finance the activities of the following fiscal period are recognized as revenue in the fund financial statements
a) in the year levied.
b) in the year for which they are intended to finance the activities.
c) when collected, regardless of when levied.
d) in the year for which they are intended to finance the activities, if collected within that period or within a period no greater than 60 days after the close of the fiscal year.

18. Under GAAP, property taxes levied in one fiscal period to finance the activities of the following fiscal period are recognized as revenue in the government-wide financial statements
a) in the year levied.
b) in the year for which they are intended to finance the activities.
c) when collected, regardless of when levied.
d) in the year for which they are intended to finance the activities, if collected within that period or within a period no greater than 60 days after the close of the fiscal year.

19. A City levies a 2% sales tax. Sales tax must be remitted by the merchants to the City by the 20th day of the month following the month in which the sale occurred. Cash received by the City related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1999 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received during 2000 related to February-November 2000 sales $200
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize in the fund financial statement as sales tax revenue for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

20. A City levies a 2% sales tax. Sales tax must be remitted by the merchants to the City by the 20th day of the month following the month in which the sale occurred. Cash received by the City related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1998 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received during 2000 related to February-November 2000 sales $200
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize in the government-wide financial statement as sales tax revenue for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

21. A City levies a 2% sales tax that is collected for them by the State. Sales tax must be remitted by the merchants to the State by the 20th day of the month following the month in which the sale occurred. The State has a policy of remitting sales taxes to the City within 30 days of collection by the State. Cash received by the State related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1999 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received 3/20/00, applicable to February 2000 sales $ 10
Amount received during 2000 related to March-November 2000 sales $190
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Amount received 3/20/01 for February 2001 $ 5
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize as sales tax revenue in its fund financial statements for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

22. A City levies a 2% sales tax that is collected for them by the State. Sales tax must be remitted by the merchants to the State by the 20th day of the month following the month in which the sale occurred. The State has a policy of remitting sales taxes to the City within 30 days of collection by the State. Cash received by the State related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1999 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received 3/20/00, applicable to February 2000 sales $ 10
Amount received during 2000 related to March-November 2000 sales $190
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Amount received 3/20/01 for February 2001 $ 5
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize as sales tax revenue in its government-wide financial statements for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

23. Under GAAP, income tax revenues should be recognized in the fund financial statements in the accounting period
a) when collected in cash by the taxing authority.
b) in which the underlying income was earned, regardless of when collected.
c) in which the underlying income was earned, if collected in time to satisfy the budgetary obligations of the preceding year.
d) when earned.

24. Under GAAP, income tax revenues should be recognized in the government-wide financial statements in the accounting period
a) when collected in cash by the taxing authority.
b) in which the underlying income was earned, regardless of when collected.
c) in which the underlying income was earned, if collected in time to satisfy the budgetary obligations of the preceding year.
d) when earned.

25. During 2000, the city issued $300 in fines for failure to keep real property in ‘acceptable’ condition. During that period the city spent $200 to mow and clean up the unoccupied properties for which the fines were assessed. The city estimates that $30 of the fines issued in 2000 will be uncollectible. During 1999 the city collected $230 related to 2000 fines and $20 related to 1999 fines. The amount of revenue that the city should recognize in its 2000 fund financial statements related to fines is
a) $230.
b) $250.
c) $270.
d) $300.

26. Under GAAP, license and permit fees should be recognized in the fund financial statements in the accounting period
a) when collected.
b) when collected, plus proceeds collected within 60 days of fiscal year-end.
c) when earned.
d) when earned, if collected within 60 days of fiscal year end.

27. A city receives a $200,000 grant from the state to purchase vans to transport physically challenged individuals. During the current year the city receives the entire $200,000 and purchases one bus for $85,000 and issues a purchase order for another van for $80,000. The grant revenue that the city should recognize on the government-wide financial statements in the current year is
a) $-0-.
b) $ 85,000.
c) $165,000.
d) $200,000.

28. A city receives notice of a $200,000 grant from the state to purchase vans to transport physically challenged individuals. Although the city did not receive any of the grant funds during the current year, the city purchased one bus for $85,000 and issues a purchase order for another van for $80,000. The grant revenue that the city should recognize in the government-wide financial statements in the current year is
a) $-0-.
b) $ 85,000.
c) $165,000.
d) $200,000.

29. Payments made to a state pension plan by the state government on behalf of a local government should
a) not be displayed or disclosed in the local government financial statements.
b) be displayed as a revenue in the local government financial statements.
c) be displayed as both a revenue and an expenditure in the local government financial statements.
d) should be disclosed, but not displayed, in the local government financial statements.

30. Unrestricted grant revenues with a time requirement should be recognized in the accounting period in which
a) the award is announced.
b) the cash is received.
c) the grant may be used.
d) expenditures are recorded on grant-related activities.

31. Reimbursement-type grant revenues are recognized in the accounting period in which
a) the award is made.
b) the cash is received.
c) cash is disbursed on grant-related activities.
d) expenditures are recorded on grant-related activities.

32. A local governmental entity began the year with a security with an historical cost of $85 and a fair value at the beginning of the year of $95. During the year, dividends of $2 were received. At the end of the year the security had a fair value of $100. The amount that should be recognized on the fund financial statements for the year as investment income is
a) $-0-.
b) Gain $7.
c) Gain $15.
d) Gain $17.

33. A local governmental entity began the year with a portfolio of securities with an historical cost of $600 and a fair value of $620. During the year the government acquired an additional security at a cost of $130 and sold for $100 a security that had an historical cost of $86 and a fair value at the beginning of the year of $95. At the end of the year the securities portfolio had a fair value of $665. The amount that should be recognized on the financial statements for the year as investment income is
a) Gain $5.
b) Gain $10.
c) Gain $14.
d) Gain $15.

34. Under GAAP, investment income for governmental entities must include
a) only dividends and interest received during the period.
b) only dividends and interest earned during the period.
c) only realized gains and losses.
d) dividends and interest received during the period and both realized and unrealized gains and losses.

PROBLEMS (CHAPTER 4)

1. Property Taxes
Assuming that the City maintains the books and record in a manner that facilitates the preparation of the fund financial statements, prepare all necessary 2000 journal entries to record the following 2000 events related to the revenues of a city. The City has a 12/31 fiscal year-end. The city has adopted the 60-day rule for all revenue recognition for which it is appropriate.

a) On January 3, the City Council levied property taxes of $1 million to support general government operations, due in two equal installments with due dates of June 20 and December 20. The property taxes were levied to finance the 2000 budget which had been adopted on November 3, 1999. Historically 2% of property taxes are uncollectible.

2. Sales Tax Revenues
Assuming that the City maintains the books and records in a manner that facilitates the preparation of the fund financial statements, prepare all necessary 2000 journal entries to record the following 2000 events related to the revenues of a city. The City has a 12/31 fiscal year-end. The city has adopted the 60-day rule for all revenue recognition for which it is appropriate. The City levies a local sales tax which is collected by the merchants and remitted to the City by the 20th day of the month following the month of sale.

a) On January 20, the City receives sales tax returns and related payments of $7,000 from the merchants of the City for the month of December 1999.

b) On February 20, the City receives sales tax returns and related payments of $3,000 from the merchants of the City for the month of January 2000.

c) During 2000 the City receives sales tax returns and related payments of $40,000 from the merchants for the months of February-November 2000

d) On January 20, 2001 the City receives sales tax returns and related payments of $7,500 from the merchants of the City for the month of December 2000.

3. Assuming that the City maintains the books and records in a manner that facilitates the preparation of the fund financial statements, prepare all necessary 2000 journal entries to record the following 2000 events related to the revenues of a city. The City has a 12/31 fiscal year-end. The city has adopted the 60-day rule for all revenue recognition for which it is appropriate.

a) On January 15, the City received notification that it was the recipient of a $200,000 federal grant to assist in the operation of a “Meals on Wheels’ program. The federal government expects to send the cash in about 3 months.

b) In February the City spent $21,000 on ‘Meals on Wheels.’

c) In March, fines of $1,200 were issued for parking tickets. Payment may be made by the citizens by mail within a specified period of time or they may be protested and a court date will be set. Approximately 10% will be abated by the Courts.

d) In April the City received the $200,000 from the federal government.

e) Payments of $800 were received in April in payment of March parking tickets.

f) Restaurant licenses are issued for a one-year period. The licenses are valid for one year from July 1 to June 30. The license fees are used to pay restaurant inspectors. In June, $7,500 in restaurant license fees was received.

ESSAY (CHAPTER 4)

1. Governmental entities use modified accrual accounting to determine when transactions and events will be recognized in the financial statements of the governmental fund types.
Required:
a) What is modified accrual accounting and how does it affect revenue recognition for the following types of revenue: property taxes; sales and income taxes; licenses, permits and fines; grants of all types; investment income; and donations.
b) In your opinion is modified accrual accounting the best basis of accounting for governmental entities? Why or why not? Defend your answer.

2. Answer the following questions with regard to preparation of the fund financial statements. At fiscal year-end, a city holds an investment portfolio in it general fund that has a fair market value of $15 million and a historical cost of $28 million. The portfolio had a fair value of $18 million at the beginning of the current fiscal year. The portfolio is composed of a variety of bonds with a face value of $29 million and a due date five years in the future. The bonds were acquired to meet a $29 million debt due five years in the future. Although the bonds have the usual market risk, the credit risk is minimal.
Required:
a) At what amount should the portfolio be valued on the balance sheet?
b) What amount, if any, should appear on the operating statement?
c) Defend the valuation method required by GAAP.
d) Argue against the valuation method required by GAAP.
e) At what amount would the City want to record the investments on their financial statements? Why?

3. Answer the following questions with regard to preparation of the fund financial statements. A local government receives three grants from the State. One grant is received in cash but must be used only for the acquisition of two vans specifically equipped to transport physically challenged citizens who use wheelchairs as a means of mobility. The second grant provides for reimbursement of costs incurred in operating a public transit system. The third grant is a distribution of State general fund revenues allocated to each City in the State based on the population of the City. This last grant is to be used in general government operations. The City also receives a federal grant which must be passed through by the City to smaller units of government who meet the eligibility requirements. The City must monitor these smaller units of government for compliance with grant requirements.
Required:
a) Discuss the various methods of revenue recognition for grants and other similar revenues.
b) Discuss the appropriate basis for revenue recognition for each of these grants.
c) Discuss the rationale for each of these methods of revenue recognition.

Chapter 5

Governmental Activities – Recognizing Expenditures and Expenses

TRUE/FALSE (CHAPTER 5)

1. Expenditures are generally recognized when resources are acquired; expenses when resources are consumed.

2. Governmental fund liabilities are considered current only when they must be liquidated with expendable available financial resources—not, as in businesses and in the government-wide statements, when they must be paid within a year.

3. In a governmental fund, expenditures for wages and salaries should be recognized in the period in which the employees earn them.

4. When accounting for inventory items in a governmental fund, GASB standards permit the use of the consumption method only.

5. When accounting for inventory items in a governmental fund, a reservation of fund balance is always required when the consumption method is used.

6. In budgeting for a governmental fund, the government should appropriate the resources for general capital assets in the periods when they are to be purchased, not those in which they will be used.

7. Per GASB standards, governments do not report general capital assets or depreciation in governmental funds.

8. When recording a general long-term liability in a governmental fund upon issuing a bond, the credit should be to a bonds payable account.

9. Most governments budget (appropriate) resources for principal and interest only for the period in which a payment is due—not for future payments.

10. Government-wide statements present revenues and expenses from the perspective of the government, not of individual funds.

MULTIPLE CHOICE (CHAPTER 5)

1. Which of the following funds would use the modified accrual basis of accounting in preparing its fund financial statements?
a) City Electric Utility Enterprise Fund.
b) City Hall Capital Project Fund.
c) City Motor Pool Internal Service Fund.
d) City Employee Pension Trust Fund.

2. Which of the following funds would use the accrual basis of accounting in preparing its fund financial statements?
a) City General Fund.
b) City Hall Capital Project Fund.
c) City Motor Pool Internal Service Fund.
d) None of the above.

4. Assume that the City of Juneau maintains its books and records to facilitate the preparation of its fund financial statement. The City pays its employees bi-weekly on Friday. The fiscal year ended on Wednesday, June 30. Employees had been paid on Friday, June 25. The employees paid from the General Fund had earned $120,000 on Monday, Tuesday, and Wednesday (June 28, 29, and 30). What entry, if any, should be made on June 30?
a) Debit Expenditures; Credit Wages and Salaries Payable.
b) Debit Expenses; Credit Wages and Salaries Payable.
c) Debit Expenditures; Credit Encumbrances.
d) No entry is required.

5. Assume that the City of Juneau maintains its books and records to facilitate the preparation of its fund financial statements. The City pays its employees bi-weekly on Friday. The fiscal year ended on Wednesday, June 30. Employees had been paid on Friday, June 25. The employees paid from the General Fund had earned $120,000 on Monday, Tuesday, and Wednesday (June 28, 29, and 30). They will earn $80,000 on Thursday and Friday (July 1 and 2). What entry, if any, should be made on June 30?
a) Debit Expenditures $120,000; Credit Wages and Salaries Payable $120,000.
b) Debit Expenditure $200,000; Credit Wages and Salaries Payable $200,000.
c) Debit Expenses $120,000; Credit Wages and Salaries Payable $120,000.
d) No entry is required.

6. Assume that the City of Juneau maintains its books and records to facilitate the preparation of its government-wide financial statements. The City pays its employees bi-weekly on Friday. The fiscal year ended on Wednesday, June 30. Employees had been paid on Friday, June 25. The employees paid from the General Fund had earned $120,000 on Monday, Tuesday, and Wednesday (June 28, 29, and 30). They will earn $80,000 on Thursday and Friday (July 1 and 2). What entry, if any, should be made on June 30?
a) Debit Expenditures $120,000; Credit Wages and Salaries Payable $120,000.
b) Debit Expenditure $200,000; Credit Wages and Salaries Payable $200,000.
c) Debit Expenses $120,000; Credit Wages and Salaries Payable $120,000.
d) No entry is required.

7. Employees of the City of Orleans earn ten days paid leave for each 12 months of employment. The City has a policy that employees must take their vacation days during the year following the year in which it is earned. If they do not take vacation in the allotted period, they forfeit the vacation pay benefit. Traditionally, employees have taken 80% of the vacation days earned. During the current year, employees of the City of Orleans earned $400,000 in vacation pay. Assuming the city maintains its books and records in a manner to facilitate the preparation of the fund financial statements, which of the following entries is the correct entry in the General Fund to record the vacation pay earned during the current period?
a) Debit Expenditures $400,000; Credit Vacation Payable $400,000.
b) Debit Expenses $400,000; Credit Vacation Payable $400,000.
c) Debit Expenditures $320,000; Credit Vacation Pay Payable $320,000.
d) No entry required.

8. Employees of the City of Orleans earn ten days paid leave for each 12 months of employment. The City has a policy that employed must take their vacation days during the year following the year in which it is earned. If they do not take vacation in the allotted period, they forfeit the vacation pay benefit. Traditionally, employees have taken 80% of the vacation days earned. During the current year, employees of the City of Orleans earned $400,000 in vacation pay. Assuming the city maintains its books and records in a manner to facilitate the preparation of the government-wide financial statements, which of the following entries is the correct entry in the General Fund to record the vacation pay earned during the current period?
a) Debit Expenditures $400,000; Credit Vacation Payable $400,000.
b) Debit Expenses $400,000; Credit Vacation Payable $400,000.
c) Debit Expenses $320,000; Credit Vacation Pay Payable $320,000.
d) No entry required.

9. Employees of the General Fund of Scott City earn ten days paid leave for each 12 months of employment. The City permits employees to carry the vacation days forward as long as they wish. During the current year employees earned $800,000 of vacation benefits of which the City estimates that $500,000 will be taken in the next year and the balance will be carried forward. Assuming that the City maintains its books and records in a manner that facilitates the preparation of their fund financial statements, which of the following entries is the correct entry in the General Fund to record the vacation pay earned during the current period?
a) Debit Expenditures $800,000; Credit Vacation Pay Payable $800,000.
b) Debit Expenditures $500,000; Credit Vacation Pay Payable $500,000.
c) Debit Vacation Expense $800,000; Credit Vacation Pay Payable $800,000.
d) No entry required.

10. Employees of the General Fund of Scott City earn ten days paid leave for each 12 months of employment. The City permits employees to carry the vacation days forward as long as they wish. During the current year employees earned $800,000 of vacation benefits of which the City estimates that $500,000 will be taken in the next year and the balance will be carried forward. Assuming that the City maintains its books and records in a manner that facilitates the preparation of their government-wide financial statements, which of the following entries is the correct entry in the General Fund to record the vacation pay earned during the current period?
a) Debit Expenditures $800,000; Credit Vacation Pay Payable $800,000.
b) Debit Expenditures $500,000; Credit Vacation Pay Payable $500,000.
c) Debit Vacation Expense $800,000; Credit Vacation Pay Payable $800,000.
d) No entry required.

11. Culver City recognized as revenues/expenditures those amounts collected/paid during the year or within 60 days of fiscal year-end. The City offers a pension benefit to its employees who meet certain age and years of employment criteria. The City participates in the State Pension Plan. The City’s actuarially determined contribution to the State Pension Plan for the fiscal year ended 6/30/00 is $4 million. Due to cash inflow shortages the City, which budgeted $4 million for pension payments paid only $3 million in the fiscal year ended 6/30/00. The City made the final payment September 30, 2000. Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, what is the appropriate entry to record the pension payments and recognize any associated liability?
a) Debit Expenditures $4 million; Credit Cash $3 million and Pension Payable $1 million
b) Debit Expenses $4 million; Credit Cash $3 million and Pension Payable $1 million
c) Debit Expenditures $3 million; Credit Cash $3 million
d) Debit Expenses $3 million; Credit Cash $3 million

12. Culver City recognized as revenues/expenditures those amounts collected/paid during the year or within 60 days of fiscal year-end. The City offers a pension benefit to its employees who meet certain age and years of employment criteria. The City participates in the State Pension Plan. The City’s actuarially determined contribution to the State Pension Plan for the fiscal year ended 6/30/00 is $4 million. Due to cash inflow shortages the City, which budgeted $4 million for pension payments paid only $3 million in the fiscal year ended 6/30/00. The City made the final payment September 30, 2000. Assuming the City maintains its books and records in a manner that facilitates the preparation of the government-wide financial statements, what is the appropriate entry to record the pension payments and recognize any associated liability?
a) Debit Expenditures $4 million; Credit Cash $3 million and Pension Payable $1 million
b) Debit Expenses $4 million; Credit Cash $3 million and Pension Payable $1 million
c) Debit Expenditures $3 million; Credit Cash $3 million
d) Debit Expenses $3 million; Credit Cash $3 million

13. The amount of pension expenditures that should be recognized in the General Fund financial statements during the current year is
a) The amount paid.
b) The amount paid plus the amount that will be paid with available expendable financial resources.
c) The amount paid so long as it does not exceed the actuarially determined amount.
d) The actuarially determined amount.

14. The amount of pension expenditures that should be recognized in the government-wide financial statements during the current year is
a) The amount paid.
b) The amount paid plus the amount that will be paid with available expendable financial resources.
c) The amount paid so long as it does not exceed the actuarially determined amount.
d) The actuarially determined amount.

15. This year Port City was sued for injuries sustained when a citizen slipped and broke her hip on the icy City Hall steps. The City attorney estimates the City will be held liable by the courts and a judgment of $200,000 will result. Because of the nature of the case it will likely be four years before the City makes any payment related to the accident. The present value of the likely future payment is $167,000. In the General Fund, at the end of the current fiscal year, Port City should recognize a liability of
a) $200,000.
b) $167,000.
c) $0 with required note disclosure.
d) $0 with no required not disclosure.

16. Several years ago, Grant County was sued by a former County employee for wrongful discharge. Although it was to be contested by the County, at the time of the lawsuit the attorneys felt that that the County was likely to lose and the estimated amount of the ultimate judgment would be $100,000. This year, the case was finally settled with a judgment against the County of $150,000, which was paid. Assuming that the county maintains its books and records in a manner to facilitate the preparation of its fund financial statements, the entry in the current year should be
a) Debit Expenditures $150,000; Credit Cash $150,000
b) Debit Expenses $150,000; Credit Cash $150,000
c) Debit Expenditures $50,000 and Claims Payable $100,000; Credit Cash $150,000
d) Debit Expenses $50,000 and Claims Payable $100,000; Credit Cash $150,000

17. Several years ago, Grant County was sued by a former County employee for wrongful discharge. Although it was to be contested by the County, at the time of the lawsuit the attorneys felt that that the County was likely to lose and the estimated amount of the ultimate judgment would be $100,000. This year, the case was finally settled with a judgment against the County of $150,000, which was paid. Assuming that the county maintains its books and records in a manner to facilitate the preparation of its government-wide financial statements, the entry in the current year should be
a) Debit Expenditures $150,000; Credit Cash $150,000
b) Debit Expenses $150,000; Credit Cash $150,000
c) Debit Expenditures $50,000 and Claims Payable $100,000; Credit Cash $150,000
d) Debit Expenses $50,000 and Claims Payable $100,000; Credit Cash $150,000

18. The City of Upper Falls accounts for its inventory using the purchases method. During the year the City bought $400,000 of supplies, for which it owed $100,000 at year-end. The City will pay for the supplies from available expendable financial resources. The appropriate entry is
a) Debit Expenditures $400,000; Credit Cash $300,000 and Accounts Payable $100,000.
b) Debit Expenditures $300,000; Credit Cash $300,000.
c) Debit Supplies Inventory $400,000; Credit Cash $300,000 and Accounts Payable $100,000.
d) Debit Supplies Inventory $300,000; Credit Cash $300,000.

19. Bay City uses the purchases method to account for supplies. At the beginning of the year the City had no supplies on hand. During the year the City purchased $600,000 of supplies for use by activities accounted for in the General Fund. The City used $400,000 of those supplies during the year. Assuming that the city maintains its books and records in a manner that facilitates the preparation of the fund financial statements, at fiscal year-end the appropriate account balances related to supplies expenditures and supplies inventory would be
a) Expenditures $600,000; Supplies Inventory $200,000.
b) Expenditures $600,000; Supplies Inventory $0.
c) Expenditures $400,000; Supplies Inventory $200,000.
d) Expenditures $400,000; Supplies Inventory $0.

20. Shoshone County uses the consumption method to account for supplies. At the beginning of the year the City had no supplies on hand. During the year the City purchases $600,000 of supplies for use by activities accounted for in the General Fund. The City used $400,000 of those supplies during the year. At fiscal year-end the appropriate account balances on the General Fund financial statements would be
a) Expenditures $600,000; Supplies Inventory $200,000.
b) Expenditures $600,000; Supplies Inventory $0.
c) Expenditures $400,000; Supplies Inventory $200,000.
d) Expenditures $400,000; Supplies Inventory $0.

21. Sugar City uses the purchases method to record all prepayments. The City has a 6/30 fiscal year-end. On December 31, 2000, the city purchased a three-year insurance policy covering all city owned vehicles acquired by the General Fund to be used in general government activity. Cost of the policy was $360,000. After the 6/30/01 closing entries, the appropriate balance sheet accounts and balances associated with this transaction are:
a) Prepaid Insurance $300,000; Expenditure $60,000.
b) Prepaid Insurance $300,000; Expenditures $360,000
c) Prepaid Insurance $0; Expenditure $360,000.
d) Prepaid Insurance $0; Expenditures $60,000.

22. Campbell County uses the consumption method to record all inventories and prepayments. The City has a 9/30 fiscal year-end. On April 1, 2000, the County purchased a two-year insurance policy at a total cost of $400,000, paying for the policy out of the General Fund. On the General Fund financial statements, the amount of insurance expenditures for the fiscal year ended 9/30/00 would be
a) $400,000.
b) $300,000.
c) $200,000.
d) $100,000.

23. On July 1 Gilbert County bought computer equipment for use in the administrative offices of the County. The equipment has an estimated useful life of three years and salvage of $10,000. Gilbert County has a 6/30 fiscal year-end. Assuming that the County maintains its books and records in a manner that facilitates the preparation of fund financial statements, the $70,000 cost of this equipment would require which of the following entries?
a) Debit Expenditures $70,000; Credit Cash $70,000
b) Debit Equipment $70,000; Credit Cash $70,000
c) Debit Expenses $70,000; Credit Cash $70,000
d) No entry in the General Fund

24. On July 1 Gilbert County bought computer equipment for use in the administrative offices of the County. The equipment has an estimated useful life of three years and salvage of $10,000. Gilbert County has a 6/30 fiscal year-end. Assuming that the County maintains its books and records in a manner that facilitates the preparation of government-wide financial statements, the $70,000 cost of this equipment would require which of the following entries?
a) Debit Expenditures $70,000; Credit Cash $70,000
b) Debit Equipment $70,000; Credit Cash $70,000
c) Debit Expenses $70,000; Credit Cash $70,000
d) No entry in the General Fund
25. Pocahontas School District, an independent public school district, financed the acquisition of a new school bus by signing a note for $90,000 plus interest on the unpaid balance at 6%. Annual principal payment of $30,000, plus interest, are due each July 1. Assuming that the District maintains its books and records in a manner that facilitates the preparation of the fund financial statements, the appropriate entry in the General Fund at the date of acquisition is
a) Debit Expenditures $90,000; Credit Notes Payable $90,000.
b) Debit Fixed Assets $90,000; Credit Notes Payable $90,000.
c) Debit Expenditures $90,000; Credit Other Financing Sources $90,000.
d) Debit Fixed Assets $90,000; Credit Other Financing Sources $90,000.

26. Pocahontas School District, an independent public school district, financed the acquisition of a new school bus by signing a note for $90,000 plus interest on the unpaid balance at 6%. Annual principal payment of $30,000, plus interest, are due each July 1. Assuming that the District maintains its books and records in a manner that facilitates the preparation of the government-wide financial statements, the appropriate entry at the date of acquisition is
a) Debit Expenditures $90,000; Credit Notes Payable $90,000.
b) Debit Fixed Assets $90,000; Credit Notes Payable $90,000.
c) Debit Expenditures $90,000; Credit Other Financing Sources $90,000
d) Debit Fixed Assets $90,000; Credit Other Financing Sources $90,000

27. Several years ago, Durham City issued $1 million in zero coupon bonds due and payable in 2010. The bonds were sold at an amount to yield investors 6% over the life of the bonds. During the current year, how much interest expenditures would Durham City recognize related to these bonds?
a) Difference between the present value of the bonds at the beginning of the period and the present value of the bonds at the end of the period.
b) Face amounts of bonds times 6%.
c) Book value of bonds times 6%.
d) None.

28. The City of Holbrook transferred $100,000 from the General Fund to the Debt Service Fund for payment of interest. The appropriate entry in the General Fund to record this transfer would be
a) Debit Expenditures $100,000; Credit Cash $100,000.
b) Debit Other Financing Uses—Nonreciprocal Transfer Out $100,000; Credit Cash $100,000.
c) Debit Fund Balance—Transfer Out $100,000; Credit Cash $100,000.
d) Debit Other Financing Sources—Nonreciprocal Transfer In $100,000; Credit Cash $100,000.

29. Harris County transferred $200,000 from the General Fund to the Motor Pool Internal Service Fund to pay for the use of automobiles during the first six months of FY 2001. The appropriate entry in the General Fund to record this transfer of cash would be
a) Debit Expenditures $200,000; Credit Cash $200,000.
b) Debit Other Financing Uses—Transfer Out $200,000; Credit Cash $200,000.
c) Debit Fund Balance—Transfer Out $200,000; Credit Cash $200,000.
d) Debit Other Financing Sources—Transfer In $200,000; Credit Cash $200,000.

30. Other financing sources/uses would appear on which of the following statements?
a) Balance Sheet.
b) Statement of Revenues, Expenditures, and Changes in Fund Balance.
c) Cash Flow Statement.
d) None of the above.

PROBLEMS (CHAPTER 5)

1. Employees of the City of Hastings are paid from the general fund semi-monthly on the 15th day and the last day of the month. The City provides numerous employee benefits. Employees earn ten vacation days for each 12 months of employment. The employee can take the vacation during any summer months (May-September) prior to retirement. The employees also earn one sick day for each month of employment. Sick pay vests at the completion of five years of continuous service. Vested unused sick pay will be paid upon retirement or termination. The City contributes to a retirement plan that is administered by the State. Each year the City gets a statement from the State explaining the actuarially determined contribution required.

The City recognizes revenues/expenditures when collected/paid or if collected/paid within 60 days of year-end. The City’s fiscal year end is December 31. At the beginning of the current year employees had $.4 million of earned vacation time and $7 million of vested earned sick leave. The City uses the FIFO method of accounting for vacation and sick days.

REQUIRED: Assuming that the City maintains its books and records in a manner to facilitate the preparation of its fund financial statements, record the following transactions related to employee salaries and benefits. Be sure to make ALL necessary entries

a. During the year employees of the City earned $50 million. At year-end all but $2 million had been paid to the employees.

b. During the year the employees of the City earn $2 million in vacation pay. By year-end the employees had taken $1.5 million of vacation. Of the balance of vacation pay due to the employees, the City estimates that $.3 million will be taken during the next year and $.2 million will be deferred until later.

c. During the year the employees of the City earned $3 million in sick pay, of which $2.5 million is expected to vest. Of the $2.5 million, employees are expected to take $2.0 million and $.5 million is expected to be paid to employees upon their termination or retirement. During the year employees took $1 million in sick days.

d. The City received a statement from the State requiring a contribution to the Retirement Plan of $7 million for the current year. Because of a cash shortage the City paid $5 million of the required contribution during the year, $1.5 million on February 15 of the following year and $.5 million in June of the following year.

2. During the year the City of Hamburg engaged in the following transactions. The City uses the consumption method of recording inventories and prepayments. The City has a 6/30 fiscal year end. REQUIRED: Record the following transactions related to supplies, prepaid items and fixed asset acquisitions. Be sure to make ALL necessary entries.

a. During the year the City purchases $600,000 of expendable supplies.

b. On September 1 the City paid $360,000 for a three-year insurance policy to cover some assets used in general government activities.

c. On December 1 the City purchased four pickup trucks for general government activities. The trucks cost $100,000 in total.

d. On April 1 the City leased a copying machine. The lease qualified as an operating lease. The terms of the lease require yearly payments of $2,000 each April 1 for 5 years. The City prepaid the entire five years of the lease.

3. During the year, the City of Pittsboro engaged in the following transactions. The City has a 12/31 fiscal year end. REQUIRED: assuming that the City maintains its books and records in a manner to facilitate the preparation of its fund financial statement, record the following transactions related to fixed asset acquisition and payments on long-term debt.

a. On April 1 1998, the City acquired a piece of equipment for $140,000. The equipment will be used by the Street Department. The City financed the purchases by borrowing $140,000 from the local bank at 5% interest. Principal payments of $20,000 plus interest are due yearly each April 1.

b. The City transferred $1,500,000 from the General Fund to the Debt Service Fund to make principal and interest payments during the current year.

c. The City made payments of $1 million principal and $500,000 interest on bonds that had been outstanding for several years.

d. On June 1, the City paid $4,000 on account. The City owed for supplies purchased in May.

ESSAYS (CHAPTER 5)

1. When a governmental entity finances the purchases of a fixed asset, the acquisition is treated as an expenditure and reduces net financial resources during the year of acquisition. During the years that principal and interest payments are being made on the debt incurred to finance the fixed asset acquisition, the amount of the principal and interest is also treated as expenditures. This appears to reduce the net financial resources by twice the cost of the fixed asset. Discuss these transactions and their overall effect on the net financial resources of the governmental entity.

2. In the governmental fund types, expenditures are generally recognized when resources are acquired. Liabilities are generally recognized if they will be liquidated with available expendable financial resources. Define ‘available.’ Relate the definition of available to the recognition of liabilities and expenditures in governmental fund-type financial statements. Discuss the reporting deficiencies that are directly associated with the use of the ‘available’ criterion in the governmental fund-types.

3. Paid vacations, paid sick leave, and pensions are employee benefits frequently offered by governmental entities. Discuss the reporting requirements related to each of these benefits and explain, if necessary, any differences between reporting for vacation pay earned but unused, sick leave earned but unused, and pensions earned during the current period.